Yelp Inc (NYSE: YELP) shares made a 17-percent plunge in 2018 that corresponded with an equal drop in earnings before interest, tax, depreciation and amortization. Morgan Stanley said Thursday it expects ongoing challenges that lead to additional downward revisions.

The Analyst

Analyst Brian Nowak downgraded Yelp from Equal-weight to Underweight with a price target lowered from $31 to $29.

The Thesis

Yelp’s introduction of non-term agreements with no minimum dollar commitments has already depressed average revenue per user, or ARPU, this year, Nowak said, adding that he expects eventual underperformance in revenue, revenue per account and EBITDA.

“We see this pressure continuing as advertisers will now be able to adjust their spend real-time based on results (transactions, clicks, etc.), which we expect to drive ARPU down."

To offset the spending decline, Yelp would need to open 40,000 additional accounts in 2019, according to Morgan Stanley estimates. With pricing four times the cost-per-click of Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) and Facebook, Inc. (NASDAQ: FB), enticing new clients could prove challenging, Nowak said.

“Early experimentation and higher conversion may explain some of this pricing differential, but we question the sustainability of this pricing umbrella given the negative advertiser feedback, the new ability to adjust bidding based on results and GOOGL/FB's continued push to capture local ad budgets."

The company’s small and contracting user base could further stunt per-customer spending and account growth, the analyst said.

Price Action

Yelp shares were down 6.86 percent at $33.25 in premarket trading Thursday.